There’s an old saying among those versed in the idiosyncrasies of the finance world that holds true for just about everyone: nothing’s certain in life but death and taxes. However, perhaps this should be rewritten for modern times, because the real certainty is that one simply cannot live without spending money. Food, recreation, entertainment, transportation…the list goes on. Virtually everything in modern-day life necessitates shelling out the greenbacks, so it behooves all spenders to be aware of and maximize any available benefits for this
unavoidable, and often loathsome, thing called spending money.
From the most fundamental standpoint taught in every finance 101 class, there are two ways to go about parting ways with one’s capital in exchange for goods or services: cash or credit. Paying in cash certainly has its conveniences, like not having to worry about monthly payments, but consumers often note how the benefits and rewards perks fall short of the second method of purchasing–credit.
The moment a purchase is made with a debit card, the funds are immediately withdrawn from the associated checking account even though the transaction is still pending with the merchant for a few business days. In a sense, debit card users can be relatively care free when making purchases as long as they have enough cash in the account. Not actually having to pay a bill at a later time is certainly one of the most convincing arguments in favor of debit cards. Moreover, if overdraft protection is activated on the debit card account, and most retail banks offer this service, it is impossible to spend more money than is in the account, and it is subsequently impossible to go into debt.
This point truly deserves emphasis, because for potentially financially irresponsible individuals, such as young teens or elderly folk, debit cards can be a great option to limit spending within means. However, for the frequent or large spender who unwaveringly paying bills on time, credit cards are unequivocally the way to go for two distinct reasons.
First, the time value of money principle states that money is literally worth more the sooner it is received. Therefore, in regards to credit cards, the time value of money works in favor of the card holder, because for around a month (or however long the billing cycle is for the specific credit card) the credit card holder gets to hang on to their money and could hypothetically use it for other purposes.
Of course, this also means that if the credit card holder does not currently have the funds to cover an expensive purchase, a credit card will enable them to make purchases in times of absolute necessity, such as a replacing a refrigerator or fixing an automobile.
Despite the temptation of not having to pay for purchases immediately, credit cards can be a dangerous trap for this very reason. It’s entirely possible for one to spend beyond their means and end up in a bottomless sinkhole of compounding credit card debt.
When credit card bills are paid off each month in full, however, the reward points and loyalty programs are downright amazing. This is because credit card companies, for the most part, make a significant amount of their money from missed or late payment fees and interest charges on overdue balances.
If a credit card holder is merely cognizant of this, and always pays on time, they will essentially outsmart the credit lender and reap the rewards, which is the second distinct reason credit cards are superior to debit cards for the responsible spender.
Although it depends on the credit institution, perks received when credit card balances are paid can range from cash back on everyday purchases like gas and groceries, to access to exclusive airline lounges, VIP events, and celebrity chef dinners. In addition to the guaranteed rewards points for making purchases, more and more credit cards are offering incredibly generous signup bonuses, like 100,000 airline miles; this is generally enough to fly business class round-trip from Europe to the USA.
Spenders can potentially find themselves denied with credit cards for having poor or no credit history, which is a common reason some spenders opt to use debit cards for purchases. It is never too late, however, to start building credit history or improving a low credit score and take advantage of generous offers from credit card companies.
At the end of the day, spending money is unavoidable; we know this. Therefore, in most situations it makes sense to get the absolute most value for every dollar spent and use a credit card. The debit card can remain safely tucked away in your wallet until you need to use an ATM. To a lot of people, this idea of putting all expenses on a credit card and using a debit card only for ATM transactions probably sounds like common sense. Yet it is absolutely shocking how many people still use debit cards to pay for expenses that can be purchased with a credit card to accumulate valuable points and adhere to the time value of money principle.
Although it’s always sage financial advice to save whenever possible, sometimes it’s just not possible to live without spending money. With that said, simply being aware of the differences in ways to spend money can enable everyone to use the current financial system to their advantage suit their individual lifestyle.